Profit Sharing

11 Replies

Hello,

I am entering a partnership to flip houses. However, we are not yet on the same page as to how the profits should be split. I would be the person fronting the money. Thus, I have the financial risk. He would be the person bringing in the contractors that he knows. He says we should use his contractors because they would provide more reasonable prices and shorter renovation time. I would merely be supervising the renovations and helping with some of the decision making. At the end of the day, I don't believe him bringing his contractors to the table warrants a 50/50 split. Perhaps, there is something I am missing. So, can someone enlighten me as to what may be seem fair and reasonable? Thanks!

Bringing the money is usually only worth 8-15%!  Thats what the lenders are getting paid. You said you would be be merely supervising? And Helping with Some of the Decisions?

That sounds like he would be the General Contractor overseeing the day to day issues, that he is looking for the deal, that he is scheduling the contractors to come out and work.  Whose going to be working on staging and selling the property?

Obviously the two of you have had the start of a conversation and have not really drilled into the meaty bits of who is going to be responsible for what in the deal.

The entire idea is my own. He has contractors that he can use that works for him and believes that because of this, it warrants splitting 50/50. I will also be overseeing and helping with staging the property for selling. I'm not merely just handing over cash to get the property. However, I do believe that I have the biggest liability.

Here it is. I came with the idea saying that I am interested in investing my money into real estate. I want to start off small and eventually build a portfolio. He's a property manager for a cooperative development. He has contractors that work under him. He comes to me like how about we partner up. I've got a contractor that can get the work done super faster and cheaper than any other contract bid you get (bigger profit). They work for me. The thing is I don't have the money nor the credit to finance it. But, you do. So, how about you finance it, I get the contractor and we split it 50/50 if you take you initial investment off the top and 60/40 if you don't. His main responsibility is the construction.

I guess all I want is an understanding of how much that can possibly be valued as opposed to my financing the purchase, renovation and then being an active part of staging the property for selling. Is him bringing the contractor in really worth such a split?

I would say absolutely not worth 50%. your money, your name on the title, your risk, period. 

the 8% to 15% comment would be if you are able to lien other assets of his to guarantee you get paid back. unless he is offering up 50% of the financing OR allowing you to put your name on the title of some of his other property not including the investment property at hand which would then just make you a hard money lender, then the answer is no way should you pay 50%. 

you could offer a referral fee to him for contractors that actually end up being low bidder ( you go get quotes, then get a quote from his referral, if it is truly such a "deal" then pay a referral fee.) what that would be? i dont know, i probably wouldn't may more then a few hundred bucks ....and then would likely end up kicking myself for paying anything. 

that is ridiculous to pay a major percentage because someone has "access" to unique contractors.

Originally posted by @Takira Smith:

Here it is. I came with the idea saying that I am interested in investing my money into real estate. I want to start off small and eventually build a portfolio. He's a property manager for a cooperative development. He has contractors that work under him. He comes to me like how about we partner up. I've got a contractor that can get the work done super faster and cheaper than any other contract bid you get (bigger profit). They work for me. The thing is I don't have the money nor the credit to finance it. But, you do. So, how about you finance it, I get the contractor and we split it 50/50 if you take you initial investment off the top and 60/40 if you don't. His main responsibility is the construction.

 My understanding of this agreement as you laid out, they are his employees.  He will be the actual person doing the work.  You are providing the $$ and credit and some input.  Sounds like a pretty normal, I've got cash, and you've got braun scenario to me.

Is having a bigger cut then this guy worth not getting started in the flipping business? What the price of the house, the ARV, the construction costs? What's the actual cost? Are you splitting 20k? 50k? 100k? Is 2k worth fighting over? is $10k worth fighting over? is 20k worth fighting over? Perhaps you should find some other flippers in your area (go to an REIA, look them up here) and go with someone a little more experienced.

Like they say on Shark Tank, 50% of something is worth more than 100% of nothing.

It sounds like there is more to this story...If he is a property manager, then he absolutley has experience that he is bringing to the table. Is he bringing the buyer, managing the renos, etc.? Could you do this deal without him? I think you need to nail down exactly what each partner is going to bring to the table and be responsible for.

If nothing else, you could do one deal with him to see if you want to continue the partnership on a larger scale.

@Isaac Essex  that's exactly what it is that we are disagreeing over. The contractor doesn't exactly work for him but for his company and he's basically stating I need his guys because they will offer an estimate no other contractor can beat and for that, since he's getting me a deal, he deserves 50%. He isn't the one actually doing all the work. He does not have a buyer either. He merely has "access" to a contractor.

Why don't you just hire your own contractors and do it yourself?

Who is the one finding the deals?

I know a few hard money lenders that work on similar terms. They will do a straight hard money loan typically for a couple of points and 10-14% interest with 70% LTV OR partner 50/50 with the rehabber in a scenario like yours.

However, in the partnership situations the flipper/rehabber is doing everything from finding the property through the rehab and sale.  All the money guy is doing is putting up the funds and potentially getting a better return than the straight loan and remains entirely passive.

These tend not to be ongoing partnerships, but considered on a deal-to-deal basis.  The rehabbers tend to have their own crews.  They enter partnerships when other sources of capital tied up.  In other words, it's usually a relationship when other avenues are not available.  Neither party is excited about using this model on an ongoing basis.  For example, the flipper finds a killer deal, but doesn't have the cash available and/or the lender isn't finding good loans he wants to fund and needs to keep his money busy.

@Takira Smith Is this all local or is this guy out-of-area?  And the target properties?

I guess my advice would be offering a typical hard money loan or a 50/50 partnership on a per deal basis.  He must have a proven track record and do ALL ALL ALL the work/coordination.  Don't enter into any other umbrella agreement with him.  See how a deal or two goes.  If you're making 20-30% returns, he might be the one looking for cheaper money next time.

Wm